What Is the VAT Registration Threshold?
Value Added Tax (VAT) is a consumption tax, similar to sales tax in the United States. A percentage of the sale price is added to the item and collected as a tax. If you are a business that sells taxable items, then you may be subject to VAT law in your country. The VAT threshold lets you determine when you should start collecting VAT.
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Significance
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VAT is a tool for governments to raise revenue. VAT can be complicated, with some items charged at either a standard, exempt, zero-rated or reduced amount. The exact rate varies from country to country. For example, in the United Kingdom the standard VAT rate is 17.5 percent as of September, 2010 while the reduced rate is 5 percent.
Eligibility for VAT Registration
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If you are engaged in business in a country that charges VAT, you probably need to register for the tax. VAT-registered entities include partnerships, corporations and self-employed persons. Anyone earning an income from a trade, such as a plumber or electrician, is also classified as a business for VAT purposes. The requirement for registration is determined by the VAT threshold, or the amount of activity your business does.
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VAT Threshold
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VAT registration becomes mandatory once your business has reached the VAT threshold. In the United Kingdom, the VAT threshold is £70,000 in a 12-month period and in Australia, the threshold is AUD 75,000, as of September 2010. Each country differs regarding the actual amount of the threshold.
Exemption from VAT Registration
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If you have exceeded the VAT threshold and you think it is a temporary situation, you may be able to apply for a temporary exemption from VAT registration. If the governing authority determines that your sales are likely to exceed the threshold again it may require you to register.
Exceptions
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If you sell certain goods that are subject to customs duties, such as alcohol and tobacco, you may be required to register for VAT regardless of the level of sales. For example, in the United Kingdom any business selling alcohol or tobacco must register before making any sales. You may also be required to register for VAT before making sales of any goods or services if you are a non-resident. France, for example, requires all foreign traders to register regardless of the actual amount of sales.
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